A GROWING REGIONAL BANK HAS ADDED A RISK COMMITTEE TO ITS BOARD. O...

2015 FRM PRACTICE EXAM

23.

A growing regional bank has added a risk committee to its board. One of the first recommendations of the

risk committee is that the bank should develop a risk appetite statement. What best represents a primary

function of a risk appetite statement?

To quantify the level of variability for each risk metric that a firm is willing to accept

To state specific new business opportunities that a firm is willing to pursue

To assign risk management responsibilities to specific internal staff members

To state a broad level of acceptable risk to guide the allocation of the firm’s resources

Correct Answer: d

Rationale:

A risk appetite statement states a broad level of risk across the organization the firm is willing to accept

in order to pursue value creation. The statement is typically broadly articulated and can be communicated across

the organization, and helps to allocate resources to specific objectives at the firm.

Section:

Foundations of Risk Management

Reference:

“Understanding and Communicating Risk Appetite,” (COSO, Dr. Larry Rittenberg and Frank Martens,

January 2012).

Learning Objective:

Define risk appetite and explain the role of risk appetite in corporate governance.

Reference:

Implementing Robust Risk Appetite Frameworks to Strengthen Financial Institutions,” Institute of

International Finance, June 2011 (Executive Summary—Section 4, pp. 10–40).

Learning Objective:

Relate the use of risk appetite frameworks (RAF) to the management of risk in a firm.

Define risk culture and assess the relationship between a firm’s risk appetite and its risk culture.

2015 Financial Risk Manager (FRM®) Practice Exam